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INVESCO expects Japan rally to end

By Jenne Mannion Masato Kawada, small cap Japan fund manager at INVESCO, is bullish on Japan over th...

By Jenne Mannion

Masato Kawada, small cap Japan fund manager at INVESCO, is bullish on Japan over the long term but thinks there could be a stock market correction within the next year.

He anticipates the correction ahead of interest rate increases expected in early 2001. These rises, although likely to be small, will lead to the drying up of stock market liquidity and an end to the current rally.

Kawada is fund manager of the £120m INVESCO Japan Discovery Investment Trust and its open-ended mirror version the £93.6m INVESCO GT Japan Smaller Companies unit trust. He is based in Tokyo where he employs a bottom-up research-based approach to stock selection. The Japanese Smaller Companies fund was a top performer of all sectors of unit trusts, returning 472.14% over the 12 months from 12 October 1998 to 11 October 1999.

Kawada said the sentiment associated ahead of interest rate increases - expected in the first half of 2001 - will be significant even though the rises will be small with a first rate rise at 0.6% to 0.75% and consecutive rises peaking at 2%.

He said: "Once people expect interest rates will start to rise, many will look to take profits from investment funds and liquidity in the market will dry up. It is likely much of the money will go into property."

A key reason for his projected interest rate rise is the Government's plans to withdraw its guarantee of bank deposits of more than ¥10m after March 2001.

He said: "People will react a bit too early to get out, probably about six to nine months ahead of any rate increases. The obvious place to redirect that money is into the property market. It is likely people will also take profits from investments and redirect money into the property market. Beyond that time we have to be a bit more nervous about the Japanese market."

Over the longer term, however, Kawada foresees a higher level of investment in Japan as people turn away from low interest earning deposits.

He said: "Financial assets in Japan are about $12 trillion. Only 8% of that is in equities and investment funds compared with 38% in US. About 50% of financial assets in Japan have been sitting in bank deposits, which are yielding around 0%, compared with 13% in the US. In five years, Japan will be similar to the US today. This is government policy moving forward."

The aim of the funds managed by Kawada is to invest primarily in companies listed on the Second Section of the Tokyo Stock Exchange, the regional exchanges and those registered on the OTC market. Both funds hold a concentrated portfolio of 32 stocks and, in each case, the top 12 holdings account for around 60% of the assets.